McDonald's Largest Franchisee's IPO Could Near $1 Billion

McDonald Corp.'s biggest franchisee, Argentina-based Arcos Dorados Holdings Inc., is expected to go public this week in an offering whose value could approach $1 billion, the latest sign that the market for initial public offerings is heating up.

It's the latest piece of expansion news for Arcos, which operates 1,755 McDonald's restaurants in 19 countries and territories in Latin America and the Caribbean.

The company has been on a growth binge since it formed in 2007, opening new stores, remodeling old ones and drumming up interest in its McCafes and Dessert Centers.

Last year, it increased revenue by 16 percent compared with 2008, its first full year in operation. It hopes to capitalize on the fast-growing, upwardly mobile populations of the emerging markets where it operates.

The value of the IPO would total about $874 million if shares sell at the midpoint of the expected $13 to $15 range. Almost all of that, about $700 million, would go to investment groups selling shares rather than the company itself.

Arcos would get about $174 million. After paying bank fees and other expenses, it would net about $164 million, according to company estimates.

Growth prospects in the strong Latin American economies have investors excited and some analysts think the IPO could price well above expectations.

Arcos Dorados (the name translates to "Golden Arches") said it expects to use most of its money to open and remodel restaurants and for other spending required by its agreement with McDonald's.

Arcos CEO Woods Staton is the majority shareholder and always will be, according to the franchise agreement. After the public offering, he will control about 76 percent of the company's voting rights.

Such power structures are unusual but not unheard of, said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. Although such a structure is legal, "that doesn't mean investors should be thrilled with it," Elson said.

David Menlow, president of IPOfinancial.com, downplayed such questions.

"There are a lot of companies that do function like that and they function well," Menlow said. "(Staton) is a seasoned veteran who has an incredibly prosperous pathway that will be a benefit to all shareholders who are a part of this IPO."

Menlow said he thinks Arcos, which is already the largest fast-food chain in Latin America and the Caribbean, has plenty of room to grow.

"Granted, you have different demographics to work with, different socioeconomic levels, but we're not talking about an expansion of Ruth's Chris Steak House," Menlow said. "This is appealing to the common person."

Because Arcos is incorporated in the British Virgin Islands, it does not have to follow all the same regulations as U.S.-based public companies, according to the company's regulatory filings. For instance, the New York Stock Exchange requires U.S. companies to have a majority of independent members on its board. Arcos' six-member board includes three company executives, including Staton.

Arcos Dorados accounts for about 5 percent of the money spent at McDonald's restaurants globally.

Shares are expected to price Wednesday night, with the stock to start trading Thursday. The company would trade on the New York Stock Exchange under the ticker ARCO.

Investors that are selling their shares, making up the bulk of the IPO, include Gavea Investment in the Cayman Islands, DLJ South American Partners in Toronto, and Capital International Private Equity Fund in Irvine, Calif.

McDonald Corp.'s biggest franchisee, Argentina-based Arcos Dorados Holdings Inc., is expected to go public this week in an offering whose value could approach $1 billion, the latest sign that the market for initial public offerings is heating up.
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